Economics/Gov Qu

Should the federal government provide any support/assistance for a specific company and/or industry in the U.S.?

Thank you

AnswerTimely question, Sam, and one that is sure to stir up a conversation in your state where the auto industry is such a dominant part of the political dialogue these days. What I'm about to say here is not a criticism of you as a person. But it is a criticism of how your mind appears to be work on the subject of economics. That is because your question is poorly worded. But that's what happens when those who are not knowledgeable about economics start tromping throwing words around in a conversation about economics. They fail to understand that, in order to think clearly about economics, one must use precise terms and, if necessary, define them. Two of your words are anything but precise, and you did not define them.

(Nor, I might add, did you even spell out the rest of the word that begins with "Gov Qu" in your Subject field for this question. Slow down, man. Pay attention to what you're doing.)

For instance, what does the word "support" in your question mean? I'm pretty sure that you meant something along the lines of "investing/lending government funds," but "support" could also mean "special tax benefits" for a particular industry (horse-racing comes to mind) or "accelerated depreciation deductions" for businesses that spend < $250,000/yr. on investments in new equipment. Ditto for the word "assistance." I'm going to assume that you mean the same thing by "support/assistance": "investing/lending government funds."

From an economic standpoint, there is no sound argument for any unit of government to invest or lend taxpayers' monies (or monies borrowed from China or Saudi Arabia) in ANY business. Period. For one thing, some government employee has to make the decision to invest those funds. Are such employees qualified to make investment decisions with others' money? What background does a government employee have that qualifies her/him to make such a decision? What credential? What education? What training?

The individual who makes this kind of decision, whether employed by government or in the private sector, is a fiduciary . That imposes special responsibilities of independence, competence, and prudence on said individual. In the private sector, money managers are also fiduciaries. If they invested their clients' money for political reasons , which is what happened with the what some call the 'automobile-industry bailout,' they'd be in very hot water. . .unless they had explicit permission from each of their clients whose funds they were investing to make such an investment.

The fact is, if Solyndra, A123 Battery, et al., were sound investments, investors from the private sector would have stepped forward and put up the funds. But they weren't, and for good reason: in Solyndra's case, that company couldn't compete with the price of solar panels made in China. In the A123 Battery case, which happened only in the last few days, electric cars, at least as of now, are getting almost no traction in the marketplace. Battery manufacturing, like most types of manufacturing, has economies of scale, so that if production doesn't reach a certain level (which will vary according to the economics of the industry and the company in question), then production is uneconomic. There wasn't enough demand for electric cars, even with a $10,000/car tax credit for car-buyers from the federal government, so not enough of A123's batteries were sold for it to turn a profit. Between these two companies, the federal government squandered $785 MILLION of your money, my money, and our neighbors' money.

If a fiduciary in the private sector did that, he (or she) would be sued in a civil action and wouldn't have a leg to stand on. If the circumstances were egregious enough--i.e., the owner of the company in which the fiduciary made the investment kicked back some stock or money to the fiduciary personally--then there could be a criminal act, too.

But in the government, acting so irresponsibly is not punished. No one goes to jail. As an investor in USA, Inc., I'm madder than h*** about that. You should be, too.

Even in the GM case, the stock price of GM, which is now about $25.50/share, would have to DOUBLE for taxpayers to get our money back. . .without any interest. And, even if we did, what about those non-union employees at the Delphi subsidiary of General Motors, who lost their pensions completely while the union members of the United Auto Workers came away with 100 cents on the dollar for their pensions? What's fair about that? How'd you like to have a parent or a brother or a sister who got screwed like that?

And what's so special about the automobile industry? Why would the federal government throw away billions of taxpayer dollars to bail out an industry that made rotten decision, overpaid its executives and employees, and built lousy cars that many American refused to buy? What assurance does the government have that it will get its money back? What about the farmers in the midwest whose crops are dying because of the drought? What about a bailout for them? And once one gets on that slippery bailout slope, where does it end?(GM's stock price, now at $25.50 per share, will have to double before we get out money back. Even if that happened, which it won't, it will be without any interest to compensate us for the horrific risk we took. Fearless prediction: we'll never see that money. Never.)

For the record, I've not bought a U.S.-made car since 1971. If and when U.S. automakers start making cars that can compete with non-U.S. automobiles, I'll buy one. Eagerly. But not until.)

The simple solution is for all levels of government to stay out of the "investing" business. The decision that politicians make are political, not economics. That means that you and I are at risk. I, for one, don't want them doing that with my money, and I hope you don't want them doing that with yours, either. If YOU want to invest in GM individually, have at it. Just don't ask me to subsidize your investment decisions. . .and I won't ask you to subsidize mine.

I hope this is helpful. Please do me the favor of completing the 'Rate-the-Expert' e-mail you'll get on the heels of this reply. Your ratings and, especially, your written comments help me do a better job of helping folks like you who ask such interesting--and, in this case, timely--questions.

And if you want to read a very useful book that will change the way you think about economics, pick up a copy of 'Economics in One Lesson' by Henry Hazlitt. It's written in simple, everyday English, and you'll learn a lot from it.

Good luck, Sam. FWIW, I hope for your sake (and theirs) that the taxpayers in your state have the good sense to reject Proposition 2 next Tuesday. If they don't and I were a Michigan resident, I'd move out just as quickly as I could. Prop 2 is an absolute job-decimator. Property values will plummet, and unemployment will skyrocket because businesses will flee the state, as well they should.

Expertise

My expertise in economics is limited to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Questions dealing with macroeconomics and other sub-disciplines of the subject should be submitted to those who have the appropriate expertise.
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Experience

I work with Austrian economics (which differs in major respects from the traditional economics), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) every day in my work. I appraise closely-held businesses, provide exit-planning services, and offer high-level strategic analysis, advice, and solutions to CEOs and owners of mid-sized businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.

Awards and HonorsBusiness Valuation Volunteer of the Year (2001) - American Institute of CPAs;
Winner - Oklahoma Humorous-Speaking Contest - Toastmasters International (1971)

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